03/25/2025

Business leaders push Texas to extend expiring R&D tax credit program

Austin Business Journal | Justin Sayers | March 14, 2025

EnergyX — a lithium extracting company that services the electric vehicle sector — has been in growth mode. The company's new mining process called lithium extraction helped it raise more than $140 million, move its headquarters to Austin and work on a lithium processing facility in east Texas.

But unlike peers working in the research-and-development space, EnergyX is in its pre-revenue phase and not eligible for what company officials called "one of the largest incentives available to technology companies" — and may never be. Texas' R&D tax credit program is set to expire next year, striking a blow for EnergyX, which has said its success is "dependent on it."

"Without the tax credit, we would be at a huge competitive disadvantage with other companies building lithium projects in states that do have it," said Kelly Lugar, executive vice president of government relations at EnergyX.

It and a coalition of business and industry leaders are among those calling on the Texas Legislature to extend that franchise R&D tax credit, labeling it "critically important" amid a wave of innovation in the state in industries like advanced manufacturing, artificial intelligence, data center services, semiconductors and more.

The program was launched in 2014, one year after the Legislature approved House Bill 800, and it essentially provides those engaged in qualified research to claim either a sales tax exemption on personal property used in qualified research, or a franchise tax credit based on qualified research expenses. It's set to expire on Dec. 31, 2026.

Over the course of the program, data from the Texas Comptroller's Office shows that about $2.8 billion of these tax credits have been claimed, including a high of $412.7 million during fiscal 2024.

State Sen. Paul Bettencourt, R-Houston, and Rep. Charlie Geren, R-Lake Worth, on March 11 filed companion legislation — Senate Bill 2206 and House Bill 4393.to extend the program.

Their proposal is essentially identical to the current law and would offer a franchise tax credit for qualified research expenses. The Texas credit offered would be 8.72%, or 10.9% of new R&D in Texas, and may not exceed 50% of franchise tax liability. There is also a refundable credit for businesses below the no-tax-due threshold and new veteran-owned businesses — a move aimed at benefitting small businesses and startups.

Among those pushing for the renewal is a group that has dubbed itself Texans for Innovation. It includes the Texas Association of Manufacturers, Texas Association of Business, Texas Healthcare and Bioscience Institute, Texas Taxpayers and Research Association, Texas Chemistry Council, Texas Oil & Gas Association, Texas Economic Development Council, Dallas Regional Chamber of Commerce, Greater Houston Partnership, North Texas Commission, Opportunity Austin and Lockheed Martin.

Opportunity Austin said in a statement that the credit is "critical to economic success," noting that one company it spoke with could access $4 million in reinvestment capital through the program. That would allow it to drive new products, expand operations and more.

"Historically, smaller, growth-stage companies struggled to qualify, limiting their ability to reinvest in people, equipment and new technology," the statement said. "This initiative removes those barriers, freeing up millions in capital that fuels job creation, breakthrough advancements and sustained economic growth across multiple industries.

Texans for Innovations officials said there has been an appetite from the Legislature for an extension of the program, and described meetings with lawmakers as positive. Still, the measure is expected to potentially face some opposition. One group, Austin-based left-leaning think tank Every Texan, which advocates for a more just tax system, declined to comment.

But in the meantime, Texans for Innovation is sounding the alarm on what losing the program could mean. It said the uncertainty of not having a program past 2026 could hurt Texas' efforts to do on-shoring, re-shoring and near-shoring. It will also push companies elsewhere, where they are eligible for much-higher credits, the group said.

"Investing in R&D is essential for Texas to maintain its status as a top destination for innovation, business growth, and high-quality jobs," said Jennifer Rabb, president of the Texas Taxpayers and Research Association. "However, despite being the second-largest state economy, Texas lags behind other states in R&D investment. To bridge this gap and secure a competitive advantage, expanding and strengthening R&D tax incentives is not only beneficial but necessary."

In 2013, many of these same groups were among those who helped pass the program, essentially creating an R&D tax credit to compete with other states. The credits are extremely common in other states — and the rest of the world — and companies are also eligible for tax credits through federal programs. For instance, China offers a "super deduction" of 200% for R&D, while California offers 15% on qualified research expenditures in the state, plus 24% of research payments to a public university, public university hospital or cancer research center.

“For many industries like manufacturing, high-tech, energy, and biotechnology, the R&D process represents the critical ‘first phase.’ It’s where questions, ideas, and problems are fleshed out in labs, the field or production facilities to become the products and solutions that power the Texas economy,” said Tony Bennett, president and CEO of the Texas Association of Manufacturers and a founding member of Texans for Innovation.

Texans for Innovation has released an economic impact study that determined an extension — and expansion of the program to make it permanent — would lead to the creation of 113,000 jobs and generate nearly $139 billion in additional gross state product in its first 10 years along with $8.5 billion in wages.

John W. Diamond, director of the Center for Public Finance at Rice University’s Baker Institute for Public Policy, who authored the study, said in a statement that an R&D tax credit "will pay for itself" through the resulting economic impact of companies that would choose to invest in Texas because of it.

As of 2022, Texas ranked fifth in the country in business-funded research and development expenditures, with 4.3% of the $608 billion funded by businesses in the U.S behind California (36.2%), Washington (9.2%), Massachusetts (7.1%) and New York (4.9%), according to the study. But Texas ranked 33rd in terms of R&D expenditures, with a ratio of 1.78 relative to the state economy as a percentage of gross state product, which was below the 50-state average that is around 3.0.

A study commissioned by Texans for Innovation found that Texas is below average in terms of R&D tax credits as a proportion of its gross state product.

Texans for Innovation

The cost of expanding the tax credits was estimated at $661.4 million in FY 2026, according to the study. But that increased estimated economic activity would lead to higher state revenues from property and sales taxes, minimizing fiscal impacts, and could result in a net economic gain of $58.8 billion over 20 years.

"The implication is clear. The question is not whether Texas can afford to extend the R&D tax credit, but instead whether Texas can afford not to extend the R&D tax credit,: Diamond said.

Not strengthening the program would mean that "Texas risks falling further behind in R&D spending relative to other states," according to Glenn Hamer, president and CEO of the Texas Association of Business.

“A bold approach to R&D incentives could attract more high-tech industries, promote job creation, and cement Texas’ place as a national leader in technology and innovation. Investing in R&D is not only an investment in economic growth, but also in Texas’ future workforce, infrastructure, and overall competitiveness," he said.